French & Ryan on Company Law

Question: 1. Bob Beech is a scallop fisherman and involved in commercial scallop fishing in the coastal water of Jervis Bay in New South Wales. The stock of scallops in this water is limited and subject to protective legislation to ensure regeneration. Hence, the Scallop Fishing and Marketing Act provides for a quota system. Under the quota system, a person must apply for a quota which will permit him or her to catch 50 tonnes of scallops in a calendar year. Further, the Scallop Marketing Authority will purchase any scallops up to the quota limit for each person.The Act also provides for a number of offences. It provides that it is an offence to sell scallops caught in New South Wales waters to any person other than the Scallop Marketing Authority and it further provides that it is an offence to catch more than the quota limit. Each offence carries a fine of up to $100,000.Bob has the physical capacity to catch more than 50 tonnes of scallops in a year and wishes to make more money from his bu siness. His daughter Alice tells him that by incorporating a company he could double his catch.Is she correct?2. New Nirvana Ltd is a company controlled by the members of the hard rock band, N/N. A number of wholly owned subsidiaries of New Nirvana Ltd are involved in setting up and running the bands concerts. One of the subsidiary companies, Nuclear Blast Sounds Pty Ltd, is responsible for setting up the sound equipment at N/N concerts in Australia. At a recent N/N concert in Sydney, Nuclear Blast Sounds Pty Ltd negligently set the sound levels toohigh with the result that five audience members suffered permanent hearing loss. Unfortunately for those audience members, Nuclear Blast Sounds Pty Ltd had no negligence insurance and cannot pay the likely damages claims.Advise the injured audience members whether they can make New Nirvana Ltd liable for Nuclear Blast Sounds Pty Ltds negligence. 3. Simon, Michael and Don set up a project management company called Millennium Pty Ltd. Don is a solicitor and the constitution of Millennium Pty Ltd nominates that Don will be the solicitor for any land purchases or sales made by the company. The articles also provide that any disputes which arise between the company and its members should be first referred to an arbitrator before there are any court proceedings.After a number of years, Simon and Michael meet another solicitor who they think is more efficient than Don and they appoint him as solicitor for Millennium Pty Ltd.Don brings legal action against Millennium Pty Ltd over the matter. Advise the company as to their legal position. Answer: 1. In the present case, Bob Beech wants to know if he can escape the application of the provisions of Scallop Fishing and Marketing Act by forming a company. In this regard he needs to be noted that according to the doctrine of separate legal entity, a company is considered as having its own distinct identity that is separate from its members. This principle has been firmly established by the court after the decision given in Salomon v Salomon Co (1897) that applies in Australia also. Therefore in Salomon's case, it was stated by the court that the property of the company cannot be treated as the property of its members and in the same way, the debts of the company are not to be considered as the debts of its members. The influence of this doctrine is that the shareholders of a limited liability company are not held personally liable for the debts and obligations of the corporation. Therefore in case of the insolvency of the company, the loss of the shareholders of the company is re stricted to the amount that has been invested by them in the company (Baxt, 1996). However, there are certain circumstances when the court may choose to lift the corporate veil and look beyond the doctrine of individual legal identity. In this regard, the expression piercing the corporate veil is related to the situation where the court may look behind the distinct legal personality of a corporation (Birds, 2007). Therefore in such a case, the court looks beyond the individual personality of the corporation for imposing a liability, right or duty to a member of the company even when the strict application of the doctrine of separate legal identity will result in vesting the right or the liability only in the company. In this way, according to the doctrine of lifting the corporate veil, the court explores the possibility of looking behind the framework of the company (or behind the distinct legal identity of a company) for the purpose of making the members of the company liable. This takes place as an exception to the general rule according to which, the members of the company cannot be held individually responsible for the debts of the corporation (Bourne, 2008). In the present case also, the Scallop Fishing and Marketing Act provides for a quota system according to which a person has to apply for a quota and then catch 50 tonnes of scallops in a single year. On the other hand, Bob Bleech has the capacity to catch more than 50 tons of scallops and at the same time, he also wants to make more money. Under these circumstances, his daughter Alice tells him that if he can incorporate a company, he will be able to double the quota of scallops. But the court may select to lift the veil and look beyond the corporate structure of the company formed by Bob and hold Bob responsible for the breach of the provisions of Scallop Fishing and Marketing Act. As a result, although a company enjoys a individual legal personality but sometimes, the court may decide to pierce the corporate veil and hold the members of the company personally liable. Therefore, Alice is not correct when she advised Bob that he can double his catch by forming a company. 2. The issue in this case is if New Nirvana Ltd can be held liable for the tort committed by one of its subsidiary companies, Nuclear Blast Sounds Pty Ltd. The reason is that as the negligence of the employees of Nuclear Blast Sounds Pty Ltd, five members of the audience suffered permanent hearing loss. At the same time, Nuclear Blast Sounds Pty Ltd does not have any negligence insurance and similarly, the company is not in a position to pay the damages claims. As a result the question arises if the Indian members of the audience can bring a claim against New Nirvana Ltd for the negligence of Nuclear Blast Sounds Pty Ltd. In view of the doctrine of separate legal identity, generally the parent company is not held liable for the debts or the torts of its subsidiary company. The reason is that according to the law, each company is considered as having distinct legal identity in the eyes of law. Therefore, the debts and obligations of one company cannot be enforced against the members of the company or even against its parent company (Barkehall, 1997). As a result of this doctrine, in case of a group of companies, the liabilities of one company can be enforced against the other companies of the group. But there are certain exceptions to this general rule. As a result in some cases, the court may decide that the liabilities of a subsidiary company can be enforced against the parent company. Consequently, the court may decide to lift the veil and enforce the liabilities of a subsidiary corporation against the parent company on the grounds of exceptional agency or on the ground of facade or sham. As in Smith, Stone Knight v Birmingham Corporation (1939), the court was in favour of lifting the veil and holding the parent company liable. In this case, the court recognised an exception to Salomon's principle. The subsidiary company was considered by the court to be carrying on the business of the parent company. In such a case, the issue arises if the persons controlling the two companies can be considered as the head and brain of the venture with the help of the concept of effective and constant control over the business. Therefore, the court stated that in order to identify the agency relationship between the two companies, it is required that the parent company should have more than mere control over its subsidiary. The result was that the court arrived at the conclusion in Adams v Cape Industries (1990) that although sometimes, the group of companies can be considered as a single economic units but to enforce the liability of the subsidiary company on the parent company, it is required that the subsidiary company should be completely under the control of the parent company. Under these circumstances, it can be inferred that the principal provided by the court in Salomon's case implies in such a situation that the single economic unit will have to be considered as having a single identity in the eyes of law when no artificial separation is present between the various legal entities of the group (French et al., 2008). In this case also, If it can be said that New Nirvana Ltd had complete and total control over the activities of, Nuclear Blast Sounds Pty Ltd, only then the liabilities of Nuclear Blast Sounds Pty Ltd can be enforced against New Nirvana Ltd and the five members of the audience have suffered injuries as a result of the negligence of Nuclear Blast Sounds Pty Ltd can be allowed to bring a claim against New Nirvana Ltd. 3. The present case, it has been stated in the articles of Millennium Pty Ltd that Don will act as companys solicitor for any land purchases or sales. However after several years, Simon and Michael met another solicitor who was more efficient than Don, according to them. Therefore they appoint the new person as the solicitor of Millennium Pty Ltd. under the circumstances, the issue arises if Don can enforce the article according to which, he will remain the solicitor of the company. In this regard, the law provides that a member of the company can sue the company for the enforcement of rights only as a member of the company cannot in any other capacity (Baxt, 1991). For instance, Eley v Positive Government Security Life Assurance Co Ltd (1876) is also related with the articles of association of a corporation as a contract that has been formed between the corporation and its member. In this case also, it has been mentioned in articles that Eley will act as companys solicitor. However after some time, the directors of the company decided that another person should be appointed as the company's solicitor. The result was that Eley wanted to enforce the article according to which he was to remain the solicitor of the company. The court held in this case that this article cannot be enforced by Eley in such a way. The reasoning of the court was that in this case, Eley was trying to impose this as a solicitor and not in his capacity as the companys member. Therefore the court stated that either the article of the company was a stipulation that binds the members or it was a mandate for the directors. But in each case, it remains a matter between the directors and the shareholders of the company and not between them and the claimant. In this case also, Don was trying to enforce the article of the company in his capacity as a solicitor and not as a member of Millennium Pty Ltd when Simon and Michael decided that another person to be appointed as companys solicitor instead of Don. In this way, the facts of this case are similar to Eley's case mentioned above. Therefore on the grounds that have been discussed above, it can be said that in this case also Don cannot enforce the article of the company in his capacity as the company's solicitor. Hence, Millennium Pty Ltd can avoid another person as the solicitor of the company and replaced Don even if it was stated in the articles that Don will be the company's solicitor. References Barkehall S Thomas, 1997, Knowing Receipt and Knowing Assistance: Where do we Stand? 20 University of New South Wales Law Journal 1 Baxt R, 1991, Company Law Reform The Future and Fixing Up the Past The Doctrine of Ultra Vires, 19 Australian Business Law Review 147 Baxt R, 1996, Informality may be a Good Thing but it may be Very Dangerous, 24 Australian Business Law Review 463 Birds, J., 2007, Boyle Bird's Company Law, 6th Edition, Jordans Bourne, N., 2008, Bourne on Company Law, 4th Edition, Routledge-Cavendish French, D., Mayson, S., and Ryan, C., Mayson, 2008, French Ryan on Company Law, 25th Edition, Oxford University Press Case Law Adams v Cape Industries plc [1990] Ch 433 Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88 Salomon v Salomon Co [1897] AC 22 Smith, Stone Knight v Birmingham Corporation [1939] 4 ALL ER 116